Avnet’s Vallee: FY Q3 Hurt By Slowdown In Server Sales

By Eric Savitz

Demand for servers appears to be hitting the skids.

In an interview with Tech Trader Daily earlier today, Avnet (AVT) CEO Roy Vallee said weak demand in the U.S. and Europe for server contributed to the company’s disappointing performance in the fiscal third quarter ended March.

Vallee says everything looked fine as recently as the middle of March. “To say we were disappointed is an understatement,” he says.

Avnet has two primary business units. One, known as Technology Solutions, sells servers, storage systems, software and other IT products. The other, Electronics Marketing, sells electronic components.

There were issues in each business in the latest quarter, but with differing impact. The more minor problem was in the components business, which Vallee says reported revenue about 3% below expectations. He says the shortfall came across product lines, and was uniform across geographies. He notes that Asia continued to grow at a high single-digit rate, with North America growing for the second quarter in a row. He says the region that is challenged is Europe, which he says looks fine in dollars but is declining in Euros. The strong currency has pushed down ASPs in Europe, he says.

On the computer business, he says, the story is fairly clear: there was weakness in servers in both Europe and the U.S. Storage, networking, software and services were in line or above expectations. He says sales were less than seasonal – server sales were actually down year over year – causing a double whammy: lower volume, compounded by a reduction in hardware manufacturer rebates. The company gets rebates tied to volume from its hardware partners; he notes that a reduction in rebates causes a direct hit to the bottom line.

Vallee says the weakness in servers affected all three of its key hardware partners: IBM, Hewlett-Packard (HPQ) and Sun Microsystems (JAVA).

So why the weakness in servers but not other IT categories? Vallee’s theory is that the nature of server spending is more discretionary than other tech products. “Companies are continuing to accumulate data; when they run out of bytes, they have to buy more. They’re continuing to see more traffic, and when they are out of bandwidth, they have to expand their networks,” he says. “But servers are often tied to projects, which is many cases are not time sensitive.”

Vallee also notes that the company has responded to the slowdown by cutting costs in two steps by an aggregate $40 million. Since more than 70% of the company’s costs are people related, that means layoffs: he says Avnet is reducing headcount by about 3%, which would be about 390 of the company’s roughly 13,000 employees. Most of those cuts, he says, will be in areas where the company is seeing slowing, including servers and European components.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.